Fiscal cliff breeds paycheck uncertainty

Workers will see less take-home pay unless Congress reaches an agreement.

November 28, 2012|By Scott Kraus, Of The Morning Call

By now you've probably heard that if Congress doesn't act by the first of the year, the U.S. economy will go over a "fiscal cliff" of increased taxes and automatic spending cuts.

How will that affect your paycheck in 2013?

Everyone will immediately start paying more into the Social Security trust fund because the payroll tax holiday enacted in 2010 will end. That means employees will contribute 6.2 percent of their income each paycheck instead of the 4.2 percent they paid in 2011 and 2012.

The payroll tax holiday saved Pennsylvanians $5 billion in 2012, according to the state's Independent Financial Office. People earning $52,000 a year would see their weekly paychecks shrink by $20 if it ends. The tax only applies to the first $110,000 in earnings.

"That is kind of a sleeper, because on a $100,000 income, you are talking about $2,000 over a full year," said Whitehall Township certified public accountant Mary Lew Kehm.

After that, the picture is less clear. Until a deal is made, this much is certain: Federal income tax rates will return to the levels they were before 2003. The lowest rate would rise from 10 percent to 15 percent, and the highest from 35 percent to 39.6 percent.

That will lead people like Lisa Pothering of Wescosville to cut discretionary spending. Pothering, who has been a hairdresser but isn't working now, said budgets are already tight, and if her husband's paycheck shrinks by a few percentage points, they'll have no choice.

"We'll cut going out to dinner," she said.

President Barack Obama is making his first post-election trip outside Washington on Friday to tout his proposals for avoiding the cliff, visiting a toy manufacturer in Hatfield Township, Montgomery County.

Unlike the hike in the payroll tax — which shows up on paychecks as "FICA," for Federal Insurance Contributions Act — the new income tax rates might not appear immediately in workers' checks in January. That's because employers rely on separate tax withholding tables to determine how much of each employee's paycheck should be set aside for Uncle Sam.

It's not clear when the Treasury Department will update those tables, which are based on rates, weekly income and the number of exemptions employees claim on their W-4 forms, or how quickly employers would adopt them. Small employers could take weeks or even months, Kehm said.

"If there is a feeling that a compromise is imminent, the Treasury secretary may say: 'Continue the rates as they are now and just proceed because we think something is going to happen very shortly,' " said Mike Trabold of Paychex, a national payroll company with an office in Allentown.

But that would be very unusual, he said.

Many employers are already preparing to deduct more from workers' paychecks in 2013 under the assumption that withholding rates will revert to prior levels at least for a little while, Trabold said.

The uncertainty is leaving employers with lots of questions, said Nick Antich, president of AD Computer, a Center Valley payroll administrator.

That's particularly troublesome for the owners of many small businesses, whose profits are taxed as personal income, said Kevin Dellicker, co-founder and manager of Kutztown technology consulting firm Dellicker Strategies, and a member of the Greater Lehigh Valley Chamber of Commerce taxation committee.

Not knowing what they'll pay in taxes forces many to assume they will pay more and to postpone new expenditures.

"We are nearing the end of the fiscal year," Dellicker said, "and this is when we start to figure out how much money we have for purchasing and hiring decisions."

Economists worry that if withholding rates rise and workers see smaller paychecks, they also will spend less money and that will hurt the economy. The uncertainty alone could be enough to slow consumer spending in the all-important holiday shopping season, said Kamran Afshar, a Lehigh Valley economist.

"People don't get that heavily involved in all the details," Afshar said. "What they look at is, 'Am I going to lose my rollback on wage deductions, and is my tax rate going to go up?' The longer this discussion continues, the more it will affect holiday shopping."

In the long run, assuming some deal is made to avert the fiscal cliff, 98 percent of taxpayers' income tax rates will remain the same. Neither party has proposed increasing tax rates on families earning less than $250,000, and most predictions are that threshold will actually be higher.

But if nothing is resolved and rates revert permanently to 2000 levels for everyone, the president's Council of Economic Advisers estimates U.S. consumer spending, a significant driver of the economy, could drop by $200 billion in 2013.